When the Bank of England stepped in to calm the gilt market in September and save pension funds from collapse, hedge fund Man Group didn’t panic — its quants had seen similar situations in other markets before.
The gilt market is seen as a place of stability, where investors go during bouts of volatility. Mark Jones, deputy chief executive of Man Group, told Financial News that the crisis did feel unusual because that particular market was swinging, but the pattern was a familiar one for his number crunchers.
“Spikes like that — big dramatic sell-offs driven by ultimately leveraged holders and no one on the other side — we see those patterns in other markets frequently,” he told FN.
Man Group, the world’s second largest hedge fund, uses both quantitative and discretionary strategies. Jones said its algorithms recognised what to do as gilt yields spiked and bid/offer spreads widened.
“Those things are very calm on the quant side because it is just another case of market disruption. There’s one somewhere in the world regularly; the machines have usually seen the pattern before,” he said.
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But even if a fund’s algorithms work exactly as they are supposed to, there are still risks. During the crisis, liquidity became a concern and exiting positions became a priority.
“You want to start exiting even profitable trades because you focus on the ability to complete it,” said Jones. “When you hit extremities, risk management actually becomes more important than the underlying alpha.”
Diving into the data
Man Group has been leveraging data as a major part of its strategy on both the quantitative and discretionary side. In fixed income, traditional data such as annual reports and price information remains king. But the hedge fund is increasingly utilising alternative data sets across its investment strategies — using everything from social media posts and internet activity to mobile geolocation to determine outputs such as sales and foot traffic.
“It opens up the quantitative and discretionary to perceive different parts of the world and bring those into the investment processes,” Jones tells FN. “The quants definitely use alternative data heavily, but it has piqued the interest of the discretionary investors considerably.”
Hinesh Kalian, head of data science at Man Group, told FN there has been exponential growth over the past decade for alternative data. According to a presentation at the group’s 2022 AGM, 60% of discretionary teams use alternative data.
Kalian said the firm uses satellite imagery to determine metal supply and demand by examining heat plumes over smelting plants worldwide, for example.
Satellite images are readily available, but turning those images into data a portfolio manager can use is harder.
“In the satellite imagery use case, you would have a platform that can ingest and capture raw imagery data and some data science or machine learning application on top of it,” said Kalian.
Such a process involves locating the plants, monitoring them and looking for thermal activity. Those images would also need to be turned into quantifiable data.
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Alternative data isn’t exactly new though. It used to go by a different name: detailed research data.
Jones recalled how a staffer covering European carmakers used to travel to Belgium every month to pick up a publication with car volume numbers that could only be found there. Now, with the digitalisation of data along with more third party sources, it has become much more economical to acquire such information at scale.
“At some level, it is a continuation of things people would have loved to do in the past but were just not feasible,” he said.
But while alternative data has opened up new sources of information, Jones said that traditional financial information traders have depended on for decades remains a priority.
“There is so much value in price information. It is the wisdom of crowds.”
Both the quant and discretionary side have benefitted from the investment in data. Jones believes there is a place for discretionary strategies, but they won’t be relevant if they don’t have the same technology and data support as quantitative ones.
Among hedge funds there are few willing to make that investment, Jones said. Man Group said it spends more than $100m a year on technology.
“There’s a small number of firms who have real expertise in this space. There are clearly some competitors that we think are good in this space,” he added. “But the gap between the top and the rest is widening, not reducing.”
Corrections and amplifications: This story was originally published with an image carrying an incorrect logo for Man Group plc. We have now corrected this error.
To contact the author of this story with feedback or news, email Jeremy Chan